Paytm Payments Bank fiasco: Independent directors raised concerns

Red flags were raised on regulatory issues but they may have been late

At a time when the role of corporate boards is once again under the scanner, independent directors on the Paytm Payments Bank board have indicated that red flags were raised over regulatory issues but they may have been late in doing so.

“As independent directors, we asked  questions and monitored responses to the Reserve Bank of India (RBI). Many changes were made on compliances. Obviously,  in retrospect, it was not found to be enough,” said one of the independent directors on the condition of anonymity.

It has been gathered that while independent directors were concerned with anti-money laundering and operational issues, the “real emphasis from RBI was on intra-group transactions and ‘control’ by OCL (One97 Communication) of the bank”.

All RBI correspondence was brought before the board in full detail and independent directors had many questions. It now transpires that the scale of operations and the nature of the payments business were mind boggling compared to a conventional bank. By all accounts, it now appears that independent directors and the professional management may not have been on the same page.

The four independent directors at the payments bank were Manju Agarwal, Shinjini Kumar, Ramesh Abhishek, and Pankaj Vaish. Founder Vijay Shekhar Sharma has been the part-time chairman of the board. Agarwal, a former deputy managing director of the State Bank of India, resigned from the board of Paytm Payments Bank on Thursday. While Kumar, a seasoned banker, had exited the board as independent board member recently, she’s learnt to have attended two of its meetings as special invitee. Ramesh Abhishek, a former bureaucrat, and Pankaj Vaish, who’s a startup mentor and former managing director of Accenture, are still on the board.  

The January 31 directive from RBI stopping the Paytm Payments Bank from adding customers and operating many other services came nine months after the central bank had held a meeting with the board of directors of state-run and private banks on May 22 and 29. The first-of-its-kind day-long interaction with RBI governor Shaktikanta Das, deputy governors, and the executive directors of the Department of Supervision (DoS), Department of Regulation, and Enforcement Department was “primarily on issues related to governance, ethics, the role of the boards and supervisory expectations.”

The meeting was a significant first step following finance minister Nirmala Sitharaman’s announcement in the Union Budget for FY24 on the need for improving governance and investor protection in the banking sector. Sitharaman had also proposed certain amendments to the Reserve Bank of India Act (1934), Banking Regulation Act (1949), and the Banking Companies (Acquisition and Transfer of Undertakings) Act (1970).

Das had pointed out that individual directors should not have any conflict of interest which may hamper their objectivity and independence. It is the responsibility of the board to ensure that policies are in place to identify potential conflicts of interest and deal with them. “In this respect, it is necessary that ‘independent’ directors are truly independent; that is, independent not only of the management but also of controlling shareholders while discharging their duties. They have to always remember that their loyalty is to the bank and no one else.” And “I am not advocating any confrontation, but only stressing the need for the required level of alertness among all directors.”

But fintechs seemed to think otherwise.

A survey by the Fintech Association for Consumer Empowerment in November 2022 (which is an applicant for a self-regulatory organisation from the RBI — in collaboration with the Center for Financial Inclusion — saw respondents accord very low priority to governance risks. Defined as “weakness at the board level leading to poor oversight and control”, it was ranked 19th by non-lenders and 22nd by lenders. The survey argued the responses came in at a time when other factors were top of mind, “which could explain the lower ranking.” It didn’t flesh out what these “other factors” were. The survey--Fintech Lending Risk Barometer 2022-2023: Understanding the Perception of Risks in the Fintech Lending Sector--was conducted two months after Das voiced concerns about the industry at the Global Fintech Festival in Mumbai. “We would expect the ecosystem to pay attention to governance, business conduct, regulatory compliance and risk-mitigation frameworks.”

A year earlier the executive summary of the RBI Working Group’s ‘Report on Digital Lending through Online Platforms and Mobile Apps’ (November 2021) singled out the explosion of digital lending during the pandemic -- leading to an unbridled extension of financial services to retail individuals -- as “susceptible to a host of conduct and governance issues”.

Some analysts believe that fast-paced regulatory change can affect fintechs’ business models as these are young firms that may not have the bandwidth to digest the measures. Respondents to a Boston Consulting Group Survey (with Matrix Partners, an investment firm) carried in its report — State of the Fintech Union (August 2022) — offered a mixed outlook when queried on regulatory moves on the anvil vis-à-vis the enablers needed for the industry. While 70 per cent said that regulatory moves would adversely impact innovation, 75-80 per cent also felt they would curtail bad lending practices and improve portfolio quality, and that there is a need for “a regulatory framework enabling healthy partnerships, with guardrails to check systemic risk.”

CAUGHT IN THE STORM

Sources say independent directors were concerned with anti-money laundering and operational issues

The “real emphasis from RBI was on intra-group transactions and ‘control’ by One97 Communication of the bank”

RBI correspondence was brought before the board in full detail

The January 31 directive from RBI came nine months after the central bank had held a meeting with the board of directors of 

state-run and private banks